Deliberate breach of duty according to section 4 no. 5 Professionals’ Insurance T&C

In this case, an investment company had failed to set up a special account according to the specifications in the sales prospectus of the investment for which the signature of the controller of funds was a compulsory requirement. The controller of funds knew of his duty to check whether a special account was set up according to the specifications. By omitting this control, he deliberately acted contrary to duty in the view of Higher Regional Court Munich.

Following the judgment of the Federal Court of Justice of 17 December 2014 (IV ZR 90/13), Higher Regional Court Munich thus also confirmed that the insured commits a deliberate breach of duty if he is well aware of the breached duties. In this respect it must be clear that the insured accurately perceived the duties and was conscious of acting contrary to duty. Here the insurer must first submit facts at least suggesting awareness of the breach of duty by the insured. The submission of other additional indications is not required if it is a matter breaching elementary professional duties which every professional can be expected to know about from their life experience. Accordingly, in this case a deliberate breach of duty results from the fact that the controller of funds was a contracting party of the fund control agreement and had also produced the prospectus review report, and knew the wording of the fund control agreement and the resulting duties. Also, in the panel’s view this is the cardinal duty arising from the fund control agreement. It explained that every auditor can be expected to know that he has to check the establishment of the special account with the compulsory joint signature as specified in the agreement and otherwise acts contrary to duty. Furthermore, the fund controller’s report of 22 March 2004 showed that he was well aware of this duty. Right under the heading “The individual controls are as follows” it is stated – incorrectly – that a special account which the investment company can only access jointly with the fund controller, has been set up.

The panel went on to say that the claimants are making a claim for damages in connection with their original subscription to the investment. The fund controller is liable for this as a result of a pre-contractual duty to inform future potential investors. However, if the claimants derive from this that there is no deliberate breach of the duty to provide information, the panel does not agree. The fund controller knew from the wording of the agreement that the fund control agreement was designed in favour of the investors. He thus also knew that he was directly liable to the investors for breaches of duty and thus had to take comprehensive action to rectify the irregularities in the interest of the investors. Thus he was also necessarily aware that he would make himself liable towards new investors who would participate in the investment company before the irregularities had been rectified. In addition, the fund controller knew the prospectus used to attract new investors. He therefore knew that the fund control agreement was printed in the prospectus and published for advertising purposes although no corresponding fund control was carried out. Thus he was aware that new investors were being deceived and incorrectly had to assume that the fund controller was monitoring the establishment of a special account for shareholders’ deposits and ensuring that orders were only possible if jointly underwritten. Against this backdrop it would in the panel’s opinion be unrealistic to view the consistent inaction of the fund controller as a breach of duty with regard to the old investors but not to the new investors to be recruited. Ultimately, in the panel’s view the other breaches of duty, such as the non-rectification of irregularities and the failure to warn of potential investors, are further links in the causal chain with which the deliberate breach of duty through the lack of control of the special account and use of funds was triggered.